Vodafone buying out Indian partner in mobile joint venture

Vodafone ended on Friday a fractious relationship with its Indian joint venture partner, Essar Group, but will end up paying more than earlier planned for the partner's 33 percent stake in the mobile joint venture, Vodafone Essar.

The British company said that through the deal it struck with Essar Group, it will have a total cash outflow of US$5.46 billion, higher than the $5 billion it had planned in March when it announced that it was acquiring the stake.

The payment includes a withholding tax of $880 million payable to India's Income Tax Department.

"Whilst Vodafone and Essar continue to believe that no tax is due on this transfer, it was viewed as prudent to pay withholding tax on a without prejudice basis," the company said on Friday.

Vodafone is already locked in a dispute with local tax authorities for not withholding tax before paying $11 billion to Hutchison Telecommunications International when acquiring a 67 percent stake, both directly and indirectly through Indian partners, in the joint venture in 2007.

The company holds that no tax is payable as the deal was executed abroad by two foreign companies, but the Income Tax authorities maintain that the asset was owned in India. India's income tax rules require that tax should be deducted before a payment is made to a foreign company or nonresident for assets in India.

Vodafone already directly holds 42 percent of the equity in the joint venture. To ensure that its stake stays within the maximum 74 percent limit allowed by the Indian government for foreign holdings in telecommunication service companies, 1.35 percent of the shares in Vodafone Essar will be transferred to an Indian investor, the company said on Friday.

Under an agreement between Vodafone and Essar signed in 2007, Essar had an option to sell its 33 percent share in Vodafone Essar to Vodafone for $5 billion, or an option to sell between $1 billion and $5 billion worth of Vodafone Essar shares to Vodafone at an independently appraised fair-market trading value. Essar however at one point moved to merge one of the group companies that had a stake in Vodafone Essar with a listed group company to determine the true market value of its stake.

Vodafone's investment in India has run into rough times. The company took a £2.3 billion (US$3.3 billion) charge for the Indian operation in May last year, citing "intense price competition." The company also faces the $2.5 billion bill from India's Income Tax department for the deal with Hutchison.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com

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